We recently welcomed GeoEye (GEOY) to The Value Line Investment Survey. The company is a provider of high resolution Earth imagery, image processing services, and imagery information products to United States and foreign government defense & intelligence organizations, domestic federal & foreign agencies and commercial customers. GeoEye owns and operates three Earth-imaging satellites, GeoEye-1, IKONOS, and Orbview-2, and three fixed-wing aircraft with high-resolution imagery collection capabilities. Its GeoEye-1 and IKONOS satellites principal applications include national security, mapping, oil and gas, infrastructure, mining, land use and land planning. The Orbview-2 satellite’s applications mainly comprise weather, fishing, agriculture, scientific research and environmental monitoring. The satellite imagery products include Geo, GeoProfessional, and GeoStereo that provide customers with time-critical visual imagery, data, and information. Its aerial imaging products consist of digital aerial imaging and lighting detection & ranging imaging (LiDAR). The company also owns one of the largest commercial color digital satellite imagery libraries in the world, which contains more than 405 million square kilometers of color imagery of the Earth.
The United States government is GeoEye’s largest customer representing approximately 65% of total revenues. Under the National Geospatial-Intelligence Agency’s (NGA) NextView program, the company constructed and launched its GeoEye-1 satellite. The NGA supported the project with a cost share totaling $237.0 million spread over the course of the project development and subject to various milestones, and in March 2009 paid the obligation in full. North American commercial customers currently represent 6% of total revenues, and contracts include a multi-year agreement with Google (GOOG) to provide satellite imagery for its online consumer and commercial applications (Google Earth and Google Maps). Meanwhile, many of GeoEye’s international customers purchase satellite images and data that are delivered directly to the customers’ own satellite ground stations.
The company has its eyes set on the future. As part of an agreement with the NGA’s EnhancedView program, GeoEye is set to construct its next-generation GeoEye-2 satellite. Under the terms of the contract, the NGA will contribute up to $337 million of the overall construction and launch costs of the GeoEye-2 satellite and associated ground station equipment. In addition, management is planning to strengthen its information services business and expand its Web-based delivery system. The recent announcement to acquire SPADAC, a provider of geospatial predictive analytic solutions, should aid these efforts.
We believe that GeoEye’s top and bottom lines will reach new heights in the years ahead. In all, we project annual share-earnings advances of 10%-15% going forward, driven by greater demand for the imagery services from the United States and foreign governments, contributions from the Google contract, and benefits from the company’s partnership with Lockheed Martin (LMT). The expected launch of the GeoEye-2 satellite over the 2012-2013 time frame also augurs well for business.
However, there are some risks for investors to consider. Technical issues with any of the company’s satellites would dampen our outlook. What’s more, a reduction in spending by the United States government is another concern. Lastly, increased competition from its main domestic rival DigitalGlobe (DGI) or from international competitors has the potential to hurt GeoEye’s market share.
Although shares of GeoEye do not stand out for relative price performance over the coming year, they have long-term appeal. Over the 3- to 5-year horizon we project an average annual total return of 14%. This is even after the solid runup in price that the stock has experienced over the past year. As a leader in the geospatial imagery space, GeoEye is well positioned to capture more business from the United States and foreign governments and win additional contracts from commercial customers.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.